Pages

May 18, 2011

Mobiles wait to consolidate

The domestic mobile telecommunications sector is overcrowded, but
roadblocks are preventing rapid consolidation among the Kingdom’s eight
active players, according to industry insiders.

Although Smart
and Star-Cell merged at the beginning of the year, further mergers and
acquisitions may take longer than many expect, as insiders point to
too-high valuations and a lack of synergy among some market players.

“I’m
not sure it’s going to look any different by the end of this year,”
Hello Chief Executive Officer Simon Perkins said of the country’s mobile
telecoms sector.

“People think that the businesses are valued much more than they really are,” he said.

That
sentiment has been echoed by others in the industry. Some CEOs have
told The Post that until those valuations come down, consolidation is
less likely to happen.

Smart Mobile CEO Thomas Hundt wrote that
given the present market environment in Cambodia, the real valuations of
many companies may be below their shareholders’ original investment.

Consolidation in these circumstances would then lead to write-offs, according to Hundt.

“That is likely the biggest obstacle for further consolidation,” he said.

But
at the same time, some Cambodian telecoms have the backing of
deep-pocketed shareholders, which allows them to wait for better prices
or forego an acquisition entirely, Hello’s Perkins said.

For
Hello, that shareholder is Malaysia’s Axiata Group, while Viettel, a
subsidiary of the Vietnamese military, owns Metfone, Thaicom controls
Mfone, and Vimpelcom runs Beeline.

Cambodian conglomerate Royal
Group owns CamGSM, which operates under the Cellcard brand, though
Telkom Indonesia officials said earlier this month it intended to buy a
51 percent stake in the company. No deadline has yet been given for the
deal.

Perkins said the industry was closely watching a potential deal for CamGSM.

Marc
Einstein, a telecoms analyst with Frost & Sullivan in Tokyo, agreed
that valuations weighed on Cambodia’s mergers and acquisitions market,
but he also stressed it would be some time before the industry shrunk as
expected.

He said the Kingdom’s high level of competition
reduces a company’s earnings visibility, leaving buyers wary of making a
move. Volatility in subscriber numbers and revenues per user adds to
that concern, he said.

Einstein also said most companies entering
the market have a medium- to long-term outlook, which further slows any
short-term M&A activity.

He predicted it would take five to 10 years before three to four “sustainably-profitable operators” were left in the market.

“Consolidation in telecom is something that takes years, not months,” he said.

Mark
Hanna, Chief Financial Officer at Royal Group, the owner of CamGSM,
said there may come a point where some investors stop putting money into
their companies, as some of them continue to operate at a loss.

As
a result, he said the case for consolidation was less compelling then
the possibility a number of Cambodian telecoms may simply close their
doors.

“There might be one or two deals,” Hanna said, “But companies will fold.”

Smaller
firms lack the critical mass of subscribers that would make them
attractive takeover targets, limiting possible mergers, Hanna said.

Also, many companies’ market shares overlap, he said.

Different
telecoms’ cell-phone towers and other infrastructure already operate in
the same areas, meaning the buying company wouldn’t gain any additional
coverage with an acquisition.

Hanna said gaining another
company’s frequency is one of the only positives from a merger right
now, such as if a second-generation wireless operator bought a company
that operated a third-generation network.

That was the case in
the Smart-Star Cell merger, where Smart gained a 3G license, while
taking a 75 percent stake in the merged company.

But Smart CEO
Hundt also said that the two companies’ market footprints were
complementary, creating “an immediate substantial coverage add-on.”

“Both
companies were relatively young with limited legacy, which supported a
fast and swift integration,” he said, adding: “Smart sees itself ready
for further consolidation as an active participant.”